Tech

Microsoft shares jump on cost controls

JohnLetzing

SAN FRANCISCO (MarketWatch) -- Shares of Microsoft Corp. rose Friday as Wall Street analysts cheered the software giant's ability to control costs as a sharp slowdown in demand for PCs and servers crimped the company's fiscal third-quarter profit.

Shares of Microsoft
MSFT, +0.98%
rose more than 10% to close at $20.91 -- reaching their highest level since November.

"Microsoft reported soft revenues but did follow through on reducing expenses more than it had indicated it would, which seems to have relieved investors," analyst John DiFucci of J.P. Morgan wrote in a note to clients Friday.

The company's relatively low valuation relative to its strengths also prompted an upgrade from Morgan Stanley. And Collins Stewart analyst Sandeep Aggarwal pointed out that the company's recent "downbeat" presentations -- and lack of guidance -- had positioned it to exceed lowered expectations.

Late Thursday, Microsoft posted a sharp drop in fiscal-third-quarter profit, as sales of computers loaded with the company's software fell and as it absorbed charges related to layoffs and declining investments.

Microsoft also registered its first year-over-year decline in quarterly sales since it went public in 1986 and said it expects "weakness to continue through at least the next quarter."

Net income for the quarter was $2.98 billion, or 33 cents a share, down from $4.39 billion, or 47 cents a share, in the same period a year earlier. Revenue slipped 6% to $13.65 billion.

Analysts were expecting earnings of 39 cents a share on revenue of $14.1 billion, according to data from Thomson Reuters.

Microsoft said the results included $710 million in charges related to paying severance to laid-off workers and impaired investments, which cut earnings by 6 cents a share.

The results follow a dismal Microsoft earnings report for the prior period delivered in January, when the company took the occasion to announce plans to cut some 5,000 jobs.

Microsoft is experiencing "the most difficult economic environment the company has faced in our history," Chief Financial Officer Chris Liddell said on a conference call.

Sid Parakh, an analyst who covers Microsoft for McAdams Wright Ragen, said that while Microsoft's revenue was "much lower than we were thinking," its bottom-line figure was not unexpected. It was, Parakh said, "an indication of the challenging business environment" for personal computer and server sales.

Better than feared

Microsoft also declined to offer much specific guidance for its current quarter, saying only that it expects to pull costs down because it has seen no clear sign of a coming economic turnaround.

"I didn't see any improvement at the end of the quarter that gives me encouragement that we're at a bottom and we're getting out of it," Liddell said.

While shipments of personal computers including Microsoft's Windows and other software declined in the quarter, the company has also been grappling with growing demand for pared-down netbook computers, which run significantly cheaper versions of Windows.

Microsoft estimated netbooks constituted some 10% of total personal computer shipments in the quarter, with demand continuing to grow stronger.

In addition, so-called "emerging markets" such as Brazil and Russia, which have been strategically invaluable for Microsoft in recent years, registered declines in sales of computers running Windows.

Microsoft's client unit, which includes Windows, posted a decline in revenue in the quarter to $3.4 billion from $4 billion, and delivered a profit of $2.5 billion. The unit is traditionally a cash cow and a vital source of company profitability.

The business unit that includes Microsoft's Office software -- including word processing and spreadsheets -- posted a decline in revenue to $4.5 billion from $4.7 billion, and delivered a profit of $2.9 billion.

And Microsoft's Internet-services unit continued to consume resources with relatively little to show for it, posting $721 million in revenue for the quarter and a $575 million loss. The company said online advertising revenue fell 16% in the quarter, including a "significant" drop in sales of graphical display advertising.

Yahoo Inc.
YHOO, +0.77%
earlier this week reported a sharp decline in its display advertising sales in the same period.

Microsoft is reportedly pursuing a partnership with Yahoo that would enable the companies to effectively team up against Internet advertising leader Google Inc.
GOOG, +1.03%
though executives from both companies have declined to comment publicly.

Though Microsoft is in the process of laying off 5,000 employees -- it plans for all of them to be eliminated by July, 2010 -- it also says it will hire up to 3,000 more in different, more strategic areas over the next 18 months.

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